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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": Sirtex Medical
October 1, 2007
Tim Morris, wise-owl.com analyst
Stock: Sirtex Medical
Code: SRX
Biotechnology companies offering revolutionary treatments for debilitating health problems are a ‘dime a dozen’. They all carry a blue sky story, but often make a high risk investment proposition with rewards likely to be years away, even if their product lives up to hyped up promises.
However, Sirtex Medical stands out from other local biotech companies as one of the few to have successfully brought a product to market not only in Australia, but also in substantial overseas markets such as the US and Europe. The company now travels down the road of profitability thanks to its innovative treatment for liver cancer.
It is estimated that liver cancer is the ultimate cause of death in one third of cancer sufferers. The vast majority of liver cancer patients are incurable, with 95 per cent of patients dying from the disease. Most patients are already in the advanced stages of liver cancer by the time they are diagnosed, making the already limited number of available treatment options no longer possible.
Sirtex Medical shines a ray of hope with its innovative treatment technology known as SIR Spheres. In cases where it is not possible to surgically remove liver tumours, this product can be used to deliver targeted, internal irradiation therapy directly to the tumour. The SIR Spheres technology works by selectively placing small radioactive particles in liver cancers, which then emit radiation that kills the cancer cells. This process is designed to avoid damage to the healthy liver tissue.
Specifically, the radioactive particles are millions of tiny resin microspheres, about one-third the diameter of a strand of hair, that contain a radioactive element called yttrium-90. They are administered through a small catheter guided into the liver.
Radiation is an effective agent for destroying tumours and is widely used in cancer treatment. However, organs in the body are sensitive to radiation and high doses can seriously affect or injure a patient. The SIR Spheres technology is able to selectively target cancer cells in the liver, because the company has identified the specific artery from which liver cancers derive their blood supply, and it happens to differ from the artery servicing the healthy portion of the liver. By injecting the SIR Spheres directly into this artery, the blood flow carries them directly to the cancerous cells, where they work their magic. This selective targeting spares the healthy liver tissue, making SIR Spheres more effective than other forms of radiation therapy.
Continued sales momentum, increased marketing and government support saw revenue for the FY07 come in 48% higher than the previous year, at $33.3m. The growth was evident in all key markets across Europe the US, Australia, New Zealand, Hong Kong, Malaysia, Singapore, Thailand, and India.
Unfortunately the sales growth failed to filter through to the bottom line, as the after net tax profit of $1.56m was down 13.3% from last years figure of $1.8m. The profit result was heavily affected by foreign exchange losses of $2.88m and legal fees of $3.9m. Therefore, given that the legal bill was 2.5 times the size of this years profit result, it is clear that Sirtex’s earnings performance would have been very impressive if the company were litigation free.
The legal cloud involves the company’s former Chairman, Dr Bruce Gray, and the University of Western Australian (UWA), which is fighting for ownership rights to Dr Gray’s majority shareholding in the company. Without getting too bogged down in the details, the University claims that part of the technology used by Sirtex was developed by Dr Gray while he worked at the University, which implies that actual ownership of the technology stands with the University.
The court hearing concluded on July 27 this year and a judgement on the case is now pending. This legal cloud has weighed heavily on the share price to a level where we feel that the potential upside arising from the impending clarification outweighs the downside risks. Our positive view on the stock stems from the company’s strong operational performance and the fact that sufficient value is present at current prices to overcome the financial risks arising from the legal situation.
For those investors concerned about the legal risk, it may be more appropriate to wait until the judgement is handed down. However the market reacts very fast, and for those with an appetite for risk, now may be the time to take the plunge.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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